Russia’s LNG Rush Gives Japan Strongest Bargaining Chip

Russian Energy Minister Alexander Novak in a June 6 interview with state Rossiya TV said, "We are now conducting active talks on sale of LNG from the planned projects." Photographer: Andrey Rudakov/Bloomberg

June 13 (Bloomberg) -- Japan, the world’s top importer of
liquefied natural gas, has its best opportunity to bargain for
lower prices since it started buying the power-plant fuel 44
years ago. One reason is Russia.

OAO Gazprom, OAO Rosneft and OAO Novatek plan to build more
than 50 million metric tons of LNG capacity in the next decade.
That’s 58 percent of the record 86.9 million tons Japan bought
last fiscal year after the 2011 nuclear disaster in Fukushima
idled all but two of its atomic reactors.

Even if Russia doesn’t build all those plants, Japan will
start LNG imports from Inpex Corp.’s $34 billion project in
Australia in 2017 -- the same time as shipments may start from
U.S. and Canadian shale gas. Cargoes from Mozambique will set
sail in 2018. Japan, South Korea and China are the world’s top
three importers of LNG.

The surge in supply will give buyers more say in price
talks, according to Evergreen, Colorado-based research company
Bentek Energy LLC. It will “increase Japan’s bargaining power
on new contracts and on renegotiating existing ones,” Javier
Diaz, an analyst with Bentek, said by e-mail.

Global LNG capacity will jump to 450 million tons by 2025
from 296 million tons, according to data compiled by Bloomberg
New Energy Finance. The U.S. could offer as much as 50 million
tons, or a third of that expansion, said Charles Blanchard, a
BNEF analyst.

Demand will also rise, reaching 440 million tons by 2025,
energy adviser Wood Mackenzie Ltd. said in an April report.
That’s why projects due to start between 2018 to 2022 will face
a tough time chasing customers, the Edinburgh-based company
said.

‘Pick and Choose’

Japan and South Korea, which bought 52 percent of the
world’s LNG last year and offered the highest profit for
suppliers, are in the best negotiating position, Blanchard said.

Forcing down LNG prices has become essential for Japan as
its trade balance went into a record deficit last year because
of energy imports, said Akira Ishii, senior researcher at state-affiliated Japan Oil, Gas & Metals National Corp.

From 2008 to 2010, Japan paid more than twice what China
did for LNG and slightly less than South Korea, the world’s
second-largest buyer, according to the Organization of Arab
Petroleum Exporting Countries. In 2008, the average price for
LNG to Japan was $12.5 per million British thermal units,
compared with South Korea’s $13.8 and China’s $5.4, the OAPEC
said in a February report.

Rising Costs

In 2011, the year of the Fukushima disaster, Japan’s costs
had jumped to an average $14.7 per million btu, South Korea
$12.5 and China $9.1, OAPEC data show. By December 2012, China’s
price was double the 2008 level at $10.7 per million btu, while
Japan paid $15.40, or 70 cents more than South Korea, OAPEC
said.

China will be the growth driver for the fuel through 2025,
though Japan will remain its biggest buyer, and “the overall
balance of the LNG market over the next three years will depend
on Japanese consumption,” BNEF said in an April 22 report.

Few gas exporters have pursued Japan as much as Russia,
which saw exports to Europe fall 7 percent last year as the
sovereign debt crises reduced demand. Meantime, the U.S. has
approved the first of a possible 20 projects seeking to ship
shale gas abroad that would compete with Russia’s supply.

‘Active Talks’

“We are now conducting active talks on sale of LNG from
the planned projects,” Russian Energy Minister Alexander Novak
said in a June 6 interview with state Rossiya TV. “The window
for contracts is from 2016 to 2020, so if we don’t make
decisions soon we will lose the chance and Asian countries will
agree to contracts with others.”

Russia plans to produce 40 million to 50 million tons of
LNG by 2020 for a 10 percent share of the global market from 4
percent now, Novak said.

Since March, Tokyo has hosted visits from Novak and the
chief executive officers of Rosneft and Gazprom -- both based in
Moscow and Russia’s two biggest state-owned energy companies.
The CEO of Siberia-based Novatek, a non-state producer
developing the Yamal LNG project in Russia’s Arctic region, also
visited for talks.

Rosneft is “enjoying long-standing successful
cooperation” with Japanese companies, the company said on its
website during the visit of CEO Igor Sechin to Japan in May.
Novatek has received interest from Mitsubishi Corp. and Mitsui &
Co., Japan’s two biggest trading companies, in the $20 billion
Yamal LNG project, CEO Leonid Mikhelson said in a March
interview in Tokyo.

Sakhalin Expansion

Gazprom is expanding its Sakhalin II plant, the only
operating LNG facility in Russia with about 10 million tons of
capacity, and promoting a new LNG project in Vladivostok, a
day’s journey from Japan by ship. Gazprom CEO Alexei Miller
declined to comment to reporters during his Tokyo visit in
April.

There is “steady” interest in the Vladivostok LNG
project, Miller told reporters in Moscow on April 9.

Gazprom Vladivostok LNG will offer as much as 49 percent
participation to foreign companies that will buy gas of not less
than 6 million tons, Gazprom Deputy Chief Executive Officer
Vitaly Markelov told journalists in Moscow today.

Rosneft is working with Exxon Mobil Corp. to enter the
industry with another LNG plant on Sakhalin island, the tip of
which is 40 kilometers north of Japan.

“We have more choice now” as the export monopoly of
Gazprom looks set to be split between several energy companies,
Masami Iijima, the CEO of Japan’s second-largest trading firm
Mitsui & Co., which owns 12.5 percent of Sakhalin II, said at a
briefing in Tokyo last month.

Competition

Russia’s overtures to Japan are spurred by potential
competition from the U.S., said Samuel Brothwell, Bloomberg
Industries analyst. Freeport LNG Development last month won
approval to export the fuel to Japan.

The U.S. entry “gives Japan greater pricing leverage but
only to a point,” Brothwell said.

“The U.S. is not going to become the world’s natural gas
Wal-Mart,” he said. “Others that have gas to sell round the
world -- read: Russia -- will not simply let us take away the
world’s biggest market even if we could.”

In a market where the supplier must secure buyers for its
LNG plant before it can be built, oversupply will not mean that
“there are ships full of LNG sailing around looking to unload
Somewhere” and driving down prices, BNEF’s Blanchard said.

“Oversupply means not all projects will get built,”
Blanchard said. The ones that lose out now will need to wait
“until demand grows enough to justify the higher prices.”